J & J Snack Foods Corp (JJSF) 2016 Q3 法說會逐字稿

Welcome to the J&J Snack Foods Third Quarter Earnings Conference Call. My name is Ellen and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Gerry Shreiber, CEO and President, you may begin, sir.

Thank you, Ellen. And welcome to the J&J Snack Foods Third Quarter Conference Call. I'm Gerry Shreiber, I will be your host and with me today is Bob Radano, our Senior Vice President and COO; Dennis Moore, our Senior Vice President and CFO; Marjorie Shreiber Roshkoff, our In-house Counsel; and Jerry Law, our Senior Vice President and my Personal Assistant. I will begin with the obligatory statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. Net sales decreased about 0.25% for the quarter and increased 2% for the nine months. For the quarter, our net earnings increased by 10% to $26.8 million or $1.43 a share from $24.5 million or $1.30 a share a year ago. For the nine months, our net earnings were $55.4 million or $2.95 a share, an increase of 10% from the $50.4 million or $2.68 a share a year ago. Our EBITDA, that's earnings before interest, taxes, depreciation and amortization for the past 12 months was $157.1 million, another new record. Food service. Sales to food service customers increased 1% for the quarter due to increased sales of Handhelds of 20%, Funnel Cakes up over 100%, Churros up 6% and Soft Pretzels up 3%. Sales of frozen juice bars and ices were down 4% and bakery sales were down 6%. For the nine months, food service sales were up 2% with increased sales of handhelds up 27% and funnel cake up 81%, leading the way. Sales of soft pretzels and Churros, two of our core products at modest sales increases for the 9 months. Frozen juice bars, ices and bakery sales at modest sales decreases for the 9 months. Retail grocery and supermarkets, sales of products to retail supermarkets were down 10% for the quarter. Soft pretzel sales in this sector were down 4% for the quarter and 7% for the 9 months. Sales of frozen juice bars and Italian ices were down 11% in the quarter and 8% for the 9 months.

Handhelds were down same 18% and 21% for the quarter and 9 months respectively. ICEE and frozen beverages, which includes Arctic Blast, SLUSH PUPPIE, frozen beverage and related product sales were up 2% in the quarter and 7% for the 9 months. Beverage-related sales alone were down 1% in the quarter and up 4% for the 9 months with gallon sales flat in the quarter and up 5% in our base ICEE business in the quarter and 9 months. Service revenue for others was up 7% and 10% for the 2 periods. Consolidated; gross profit as a percentage of sales in the quarter increased to 33.13% from 32.43% last year and from 30.49% to 30.75% for the 9 months. A combination of factors contributed to the gross margin and improvement including lower ingredient cost, increased volume in our handheld business, increased volume in funnel cake pricing and more favorable product mix. These were partially offset by higher cost in our frozen beverage business. And approximately $600,000 in the quarter and $1.8 billion a year, in the year of added cost related to the introduction of OREO Churros, PILLSBURY mini desert pies, WHOLE FRUIT Organic juice tubes and new PHILLY SWIRL products. And additionally, it was impacted by lower volumes in our retail supermarket business.

Total operating expense as a percentage of sales increased from 18.5% to 18.6% in this year's quarter. For the 9 months, the percentage decreased from 19.7% to 19.5%. Capital spending and cash flow. Our cash and investment securities balance increased $20 million in the quarter to $239.6 million. Let me repeat that. Our cash and investment security balance increased by $20 million in the quarter to $239.6 million, a $106 million of our investments are in corporate bonds with a yield to maturity of 2%. We continue to look for acquisitions as a use of our cash. Our capital spending was $13.5 million in the quarter as we continue to invest in plant efficiencies and growing our business. We are presently estimating capital spending for the year to be between $45 million and $50 million. A cash dividend of $0.39 a share was declared by our Board of Directors and paid on July 6, 2016. We bought back 34,052 shares of our stock during the quarter at a cost of $3.5 million, bringing our total for the nine months to a 141,700 shares at a cost of $15.3 million and that's roughly in line with our options awarded annually.

Commentary, sales of soft pretzels in food service improved this quarter as sales to restaurant chain rebounded, they were up 13% as we had sales of $1.2 million to one chain under an LTO, Limited Time Offer program. Sales to schools also improved this quarter. Handheld sales and food service continued to be strong, led by sales to two customers. Churros sales were up 6% as sales were strong across the board. Our whole-grain Funnel Cake product has been well received in schools and contributed significantly to our sales growth in this quarter and for the nine months. We also had sales of $3.8 million to our new restaurant chain customer. However, we do not expect additional funnel cakes sales to this Company in the near future. Bakery sales were down 6% as sales were down $4.4 million to one customer as that customer added a secondary supplier. We expect sales to this customer to be down about $1 million a month through January 2017 and then it should flatten up with decent comps. Additionally, cookie sales to school customers were down this quarter, as we shed some low-margin business.

Sales of soft pretzels in our retail supermarkets segment continue to be weak as our SUPERPRETZEL BAVARIAN bread items was discontinued. They were launched a year ago. However, we did see some improvement this quarter. Frozen juices and ices were down 11% in the quarter, as we had increased trade spending to introduce the WHOLE FRUIT Organic juice tubes and the new PHILLY SWIRL products. Although PHILLY SWIRL products decline continued, we expect improvement in the fourth quarter. Handheld sales in retail supermarket declined due to decreased volume and increased trade spending for the introduction of the Pillsbury mini dessert pies. Overall, increased trade spending for the introduction of the new retail supermarkets was about $600,000 in the quarter and $1.8 million for the nine months.

We do however expect significant sales in our fourth quarter of our new products, especially OREO Churros and Whole Food organic juice tubes. In frozen beverages, the ICEE group, gallon sales were flat and service revenue to others was up 7% in the quarter, as this business continues to grow. Earnings were down to higher group medical insurance cost and higher payroll cost. Operating income in the quarter increased $1.6 million from a year ago, a 4% increase. Last year, in our third quarter, we had a loss of $1.4 million in the sale of marketable securities, as we reduced our holdings of income-generating mutual funds. The difference between our net investment loss last year and our investment income this year accounted for roughly half our improvement in net earnings.

Our estimated income tax rate was 35.3% this year and 36.8% last year for the quarter and 34.9% and 36.8% for the nine months. We are estimating a range of about 35.25% to 35.5% in fiscal year 2016. So in summation, our Company continues to fare well. We are the rarest combination of talent combining wisdom and experience with young, liberal ideas. We are conservative in our discipline and liberal in our thinking, and we expect to continue to do well. I thank you very much for joining us today. And now, I will turn it back to the listeners for any questions and comments.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Francesco Pellegrino, Sidoti & Company.

Good morning, Gerry.

Good morning.

It sounds like you're running for President and you're going to be a unifier liberal in ideas --

(multiple speakers) and I have to put forth all of my effort and talent and energy to continue to drive this business, even though I got tremendous support.

Really interesting quarter is want to touch on frozen beverage sales and the gallons being flat, I was looking at some IMDb data, just looking at where box office sales were year-over-year, had a lot of box office blockbusters last summer. This summer, really not so much. I know in May, box office sales slumped like 30%, although down sales were flat, do you consider that relatively strong given the lack of traffic at movie theaters or what do you think about that number?

Well, our movie theater business has been good to us for many years and we expect that to continue to grow. We have some great connections with the largest movie theater operators, not just in this country but in the world. However, there were some other factors that affected our gallon performance. For example, Target closed nearly a 100 plus stores to snack bars and we literally lost what amounted to 30,000 gallons in there. Now, little by little, we're getting some back because we convince them to set up a separate beverage bar and we got the first 30 of them operating, and we're quite happy with the result. But every once in a while we have to face that challenge that comes over either the wrong that wasn't there and we do it well with it, but ICEE has a lot of things going as far as new business and new service award contracts. So we think that is nothing more than a speed bump, a minor speed bump for ICEE and their continued growth.

The business that you lost with Target on a volume base, what does that represent I guess as a percentage of total volume sales?

Total volume, at 30,000 gallons is a significant amount. I think, Target overall was doing some 600,000 gallons and I might be off on these numbers, but it happens now and again. We lost a lot of business when [Sirius went craze] and we lost a lot of business when Kmart closed some stores, but by and large, ICEE has -- and particularly the last four or five, six years, they've looked at these challenges and they've continued to march up the mountain with both beverage sales, equipment sales and service revenue. So we're looking at that and Dan Fachner's group is looking at that as a momentary pause.

Alright. I was trying to back into your total volume sales that you didn't call for by giving me another data point. So, I'll move on to just the margin expansion you got during the quarter. Frozen beverage and retail supermarket operating margin contracted, you got operating margin expansion in foodservice of about 240 basis points. You talked about the product mix shift and when I look at the product mix shift in foodservice, I see frozen juice bar and ICEE sales down 4% I see basically the product mix shift to items that could incorporate egg products, I know we're going to be lapping last year's avian influenza issue in which I think your costs were about $1 million higher per month, which comes up to $3 million per quarter. You raise prices to customers ultimately, how many basis points of margin expansion did you get from the price increases that are still out there that you implemented during the fourth quarter of fiscal 2015?

Well, that's a tough question. I'm really not sure we had last year and a short [capital] of time, we had to catch up with some of these egg prices and it seems like it has recovered. I'm not sure -- overall, Francesc, there is no question that we're benefiting from lower or stable commodity costs and both, so --

Go ahead.

Now, I guess what I'm really saying is, like it is, is fine. We procure out, we book out for about 6 to 8 months at a time and lower commodity costs probably keeps the lid on overall pricing too. So --

And I know, I'm going to ask this and Dennis is probably going to be lapping somewhere, but you always say, I make a mountain out of a molehill. But I think last year, the cost of eggs increased to where they were like 3% of your cost of goods sold. And I was just looking at the [braker] market and I saw that liquid egg last year was at $2.30 a dozen and now it's $0.35 a dozen. So I could almost think that maybe egg, liquid egg is maybe half of a percentage point for your total costs of goods sold.

Come on, the eggs are only used in a few of our products.

Well, I know they're not used in ICEEs and I know ICEE (multiple speakers).

Dennis, you want to handle that question?

Eggs are used in a lot of our bakery products, but they are a relatively small portion of our cost of goods sold.

I think eggs are $0.45 now.

Alright, a lot better than where they were last year.

No question about it.

Any way to quantify how it helps you out on maybe gross profit?

Not even a fraction of a fraction of a point.

All right. Okay and I'm making a mountain out of mole hill. That's it from me. Thanks again.

Good talking to you.

Same to you Gerry.

Jonathan Feeney, Consumer Edge Research.

Hi, Jonathan. How are you?

Never better, Gerry, how are you my friend?

Good. I read your note last night.

So as well, what's you thinking it isn't good.

Well done. Now if I was an investor, I would have bought in.

Well, that's good, that you are, that's a good thing. A couple of questions for you. First, I noticed a big gap between that's a, new partners and where there some do a lot of work with retail but and it seems like there was a unusually large gap this quarter between your tracked IRI take away data and you know what's your reporting to, us just as a retail channel, particularly in the ICEE and retail cold, can you explain why that is or any theories to it?

Bob Pape, are you on the call? Bob? Bob Pape is in charge of retail. I think he's on the call, but he may be on the West Coast, Bob Pape, are you on the call, he may not be, he's in the middle of traveling. I don't know, but we're certainly going to look into that and I --

Okay. Just a follow-up on that. I guess as far as -- I mean this just seems like everyone in the world I know is larger (inaudible) everyone in the world has talked about M&A activity in the food industry and I guess I'm wondering if all this activity and speculated activity could (inaudible) lose perhaps lose any kind of smaller businesses that I think about that (inaudible) a few years back on handhelds when now the things get reshuffled, they're all sometimes profitable little businesses that (inaudible) become available. What kind of environment is it out there and does all this activity help or hurt your ability to grow the business the way you had in the past, not only organically, but through acquisitions.

Well, we're obviously looking at things and I've stated almost repeatedly that the best use of cash, which is growing regularly, would be for acquisitions. There are things that we're looking at and we have some pretty tough standards, so although we may be looking at three, four, even a half a dozen things at the same time, [all] these things take years until they can come to fruition, but we are looking at things like as we speak. And the only thing (inaudible) is be patient. We're not going to do a deal just to do a deal, and we're not going to do something that's going to be so transformational that is going to shake [September] of the foundations that we're on, we're going to invest wisely, buy wisely and make sure that it's a proper fit and we can integrate it quickly and effectively.

Thank you. Last question, just an update on this food business, it's been a journey seem to be doing a little bit better, as far as rejiggering your portfolio in totality to keep up with the ever-changing standards and other idiosyncrasy to that channel, but there is a -- are we on our firm footing now. I thik you're going to get better there from here. What would you say?

I think we are and we're looking for things to get better. We've gone through all the heavy lifting with formula, we're taking sugars out, taking transfats out in there and we think we're in pretty good shape to continue to grow that business.

Okay, great. That's all I had. Thanks, Gerry.

Thank you.

Akshay Jagdale, Jefferies.

Good morning. I just wanted to ask you if you just take a step back a little bit, when we think of, first of all, good quarter. So congrats on that, but the composition of the growth in your earnings is a little upside down from how we'd like it to be, right. So we would like it to be more sales growth driven. I mean we're always going to complain as analysts, right. So again, this is a good quarter, but can you just help me understand the topline trends in the context of sort of how you manage the business longer term? I mean just it seems like there is a lot more restaurant business that is coming on and off of menu. So there's a little bit more unpredictability than before. It seems like a lot more actually unpredictability than before. But overall, the sales growth trends are softer than what we're used to seeing from your Company. Right now, it's a tough environment and so on and so forth, but can you just broadly help me understand where we are relative to where you want to be on topline growth?

Well, we certainly want to be better than what we are and you saw my comment in the news release, far be it for me to say we didn't exactly want to crow about our earnings which was significant, because they were up 10% for the quarter, but I am not happy with and our team is not happy with the sales growth in the third quarter, however and it's too early to say sometimes you get into a flat period; and then, sometimes, it's ignited. For example, the hot weather that we've really been having, I think that, that has ignited some things on our beverage and our frozen things that we'll look at in the fourth quarter. There is no guarantees, alright. But, to answe0r your question, I share your concern and we are going to fix that.

Okay. And then, getting into specifics, can you give us a sense of sort of where you are on the OREO churro rollout? Again, it seems to be taking a little longer than we would have start to really traction and I know there is some promotional expenses in there that might be impacting that, and that might answer Jonathan's question, but help me understand the rollout of OREO churros which for us at least seem like a huge opportunity. But it's just taking a lot longer to play out.

That's true. It's taken a little while longer. One of the reasons where we -- midway through the launch, we made a change in a design and the filling of a cream, which was really we want to kick ourselves because we couldn't get -- and we have a terrific partner, Mandalays, with it. We couldn't get that on board early. Now, the product comes with a cream already inside it and we're expecting not a strong quarter, a very, very strong quarter in quarter four.

Great. And just more broadly, retail supermarkets in the context of M&A, obviously, if you just look at the sales trends in your retail supermarket segment, they leave much to be desired and things seem to have gone a bit worse this quarter. Why not -- have you thought of, sort of maybe paying up to buy some brands to really bolster that segment a bit? I mean, I know you traditionally I would characterize you as a bargain hunter and that's worked out really well for shareholders. But have you thought of maybe paying up for quality brands and that helping sort of the retail supermarket effort?

To answer your question, yes, alright, is there anything that I'm ready to -- that we are ready to lay on the table? No. But even though we have a talent for finding a small little [gents] losing money in there and fixing it. In the retail novelty section, it is difficult to fix that and establish and maintain a business there. We've looked at some of the bigger possibilities there and we will continue to do so. And if something fits our criteria in there, where it is both interesting, manageable and the pricing is right, we will go ahead.

Okay. And just one last one. I know there's been quite a few questions about commodity costs and I know you are a bit hesitant on quantifying exactly what the impact is, but is it fair to say, I mean broadly speaking, part of the reason why the operating income growth and EPS growth was so strong, despite somewhat disappointing sales is because of an unusually -- I mean you have more of a tailwind from commodity cost than you typically would see, right, is that fair?

It's a fair statement. But how do we entitled to, once every few years or so.

Absolutely. No, it was a great, like I said the quarter was very solid. I'm just trying to understand the sustainability of those gross margin trends that we saw, that's all.

Thank you. But that's a fair statement Akshay.

okay, perfect. I'll pass it on. Thanks so much.

Jon Andersen, William Blair & Company.

Hi, it's actually (inaudible) for John. Today, I think -- Gerry, I just wanted to see if you could walk us through the rationale out there for the -- time thoughtful offer, it isn't I recalling when you talked about in the past, is that something you have done in the past and if so that an effective tool, going to adding that on to many of your items.

It's the customers, we've got over a $1 million in salesforce -- period time and it's a customer, it's a chain and I think was -- and it's their choice they put something on there and they're going to run it for six months, will it come back? We hope so, is they are guaranteed? No, but if we can develop some significant business and it's a product that we excel at making and developing, it's like a pretzel. So certainly we're going to go forth.

And then, I was trying can you walk us through the mechanics on the funnel cake products. So it sounds like a $3.8 million I guess somewhat pipeline in this quarter and then no additional sales until 2017 on the second quarter. I thought this was kind of a permanent item on the menu there. So where we see a lumpiness like this or sorry in Q2 will start to be more of a normal tailwind for this customer.

But we hope it would be more normal I think what happened here the customer, I think you know who it is probably got a little bit aggressive in their projections and we satisfied their requirements, in matter of fact we geared up another plant in the year and all those sales are decent, they are little bit below their projections and as a result, they have inventory probably through into our first quarter of next year, which is October to December. But we would just be speculating and you suppose to be a permanent items and the customer has a short us that they will be using all of the inventory and then sometimes, things are underprojected; sometimes, they're overprojecting; and we are flexible enough to work with both and dance with both.

Got it. So, I think they are going to work through the inventory and normal order flow after that.

Product is good, it has been extended shelf life, it's good for over a year. So we are [discussing] this next July all right then we will both have some concern.

Got it, okay. The $14 million in new product sales for Foodservice, I think is an all-time record. Has there been a step change in kind of the process around innovation and new product development or is this just kind of confluence of several products coming together at once?

I mentioned a couple years ago that I assigned a responsibility of both marketing and R&D to Jerry Law and he has added staff, he has added projects there, and we starting to -- think of it, takes a lot for trees to grow but if you treat them right, the peaches and the plums will drop every year.

So that's fair to say that we should see this year elevated level, maybe it's something to expect going forward then.

Hopefully.

And then, just last one here on the lost bakery customer, how much lead time do you get when something like this happens and is there the option to kind of replace that business to somewhere else.

Well, you don't get a lot of lead time. This was in the wind and this is a terrific customer. They have been a customer for years and we make a cookie product for them and we make it very, very well and we were the sole customer for it, I'm sorry the sole supplier. And they put together a project that they did want to have a sole supplier on this at all and finally, they worked with somebody and they wound up taking a sizable portion of the business from them, I say roughly 20% to 25%. Our people met with them and one of these wonderful meetings you guys didn't do anything wrong, we really like you and we are doing this and we are going to this but you're going to lose a certain -- and it took them a year to implement it but now it's affected our sales volume, probably a lot more than it affected our bottom line because our margins were indeed tight and the commodity factor was weighted to any kind of increases up or down in a couple of critical ingredients and components. The relationship with the customer is still good, I would say very, very good. And yes, we're looking to do what we can to replace that business.

Okay. And then, just the $4.4 million impact this quarter is a bit more than a $1 million run rate per month. Is there some seasonality there and then why is this lap in January, is that when this started to occur or --?

That's when it started in January and there is some seasonality and heavy promotional period with this.

Got it. Okay. Thanks a lot, guys.

Thank you.

Wayne Archambo, Monarch Partners.

Hi, good morning. Just on the cash balance, you've said a few times, couple questions regarding M&A and you've been looking and looking and so forth and the fact that the net cash balance is pretty significant. If it's a seller's market and not a buyer's market, at some point, would you consider returning that cash to shareholders with respect to either a special dividend or something of that nature? As seen, they're earning 2% at best; and as a shareholder, I think you have an obligation to consider that if there's nothing to buy and any thoughts?

Well, Wayne, I hear your point and we have been increasing our dividend every year since (technical difficulty) years ago we've gone 40 straight quarters, maybe 41 straight quarters of paying the dividend and every year, increasing it. We're earning 2% on this cash now which is probably I don't know 10 times what you would in a money market in there. We're not looking to set the market on yield return there and we're hopeful of using this for acquisitions. We have been hesitant to increase dramatically the payback to the shareholders and one of the reasons is that there is a controlling shareholder here, yours truly, meaning me; and it would be a little bit self-serving. So we're going to continue to look for acquisitions and if this money builds up too fast, too quickly, Dennis and his team will look at the dividend process again.

Your dividend yield is 1.2%, not exactly the yield of a REIT or a utility, so it's relatively small by other standards, right?

We're not a utility and we don't give out 80% of that. And if you look at our -- I understand -- you're right, it's 1.2%. I was thinking of the money we had invested, I apologize for that. But, it is what it is today and we're not a utility or a real estate investment trust. We're growing business with great products that is expanding nationally and internationally.

Alright and I commend you for all that I just take to see that cash earning and that's mainly observation.

Because look at the ten year treasury bonds lightly --

I'm well aware of that, I was one of the companies -- cash sitting on $10, $12 per share in cash, that's really significant.

I've never heard of companies gone out of business because they have too much cash, I've seen it the other way in my 44 years' experience, but I appreciate your comments.

And we have no further questions at this time.

I want to thank everybody for participating today and we look forward that fourth quarter all will be participating again. Thank you.

Ladies and gentlemen, this concludes today's conference, thank you for participating, you may now disconnect.